Recent readings for a strategic retreat

A group of managers at The Frederick News-Post will be shutting off mobile phones and retreating to a farm outside of town next week to kick off a strategic planning process. Gary Greene will be leading us. To get the mental wheels turning, I Tumblr’d a bunch of recently bookmarked stories on the industry. Here they are: http://geordiewilson.tumblr.com/.

Against the tide

Scores of papers have eliminated their Monday or Saturday editions; a hardy few have gone further and cut themselves back to publishing just three or four days a week. The Times-Picayune of New Orleans is the latest high-profile example of a daily paper downsizing itself to a some-daily paper.

Meanwhile, here in Frederick at The Frederick News-Post, we’re heading in the opposite direction: We brought our Monday edition back from the grave in February.

Are we nuts?

Only time will tell. But five months into this experiment the results are promising. Readers are grateful, and advertisers remain supportive.

Going into the project, we had five main goals:

  • Increase reader satisfaction: The lack of a Monday edition was a huge and continuing source of complaints from our readers. Whatever the media gurus say about the inevitability of a future where dailies aren’t daily, our readers haven’t read the memo. They made it very clear they want their local paper delivered every day. We had seen about a 15 percent decline in subscribers after cutting out Monday in 2009; our hope was to at least stem the decline.
  • Seize the opportunity to rethink the daily newspaper: As it had shrunk over recent years, our newsroom had lost much of its design expertise. We wanted to use the reinvention of a Monday paper as an opportunity to talk about design and improve our overall graphical sensibility. We also thought long and hard about the kinds of information readers need to start their week, and we developed a range of new story forms to present that information.
  • Shore up our business and sports coverage: The lack of a Monday edition is a real liability in the football and NASCAR seasons. We also saw the start of the workweek as an opportunity to burnish our local business report.
  • Change the narrative: The Frederick News-Post had been through almost four years of cutbacks and layoffs, mirroring the national decline, and the perception of the paper in the community and even in the building was that it was struggling. We saw an opportunity to make a bold statement about promise and opportunity, one that would affirm subscribers, advertisers and employees in their continued support.
  • Make money: Suspending Monday’s paper saved us hundreds of thousands of dollars in the short term. But it contributed to an erosion in our subscriber base, it cut the profitability of our third-party delivery business and it made raising home-delivery rates problematic.

I laid before the newsroom the following proposal: Design an entirely new Monday edition, with a business and sports focus and an emphasis on “agenda-setting” news for the week ahead. Make it a tabloid format, as opposed to the full broadsheet format we use the rest of the week, but keep the feel of a daily newspaper, with as much of the daily furniture (comics, editorials, letter, classifieds, advice columns, etc.) as we can. Here’s what emerged:

Along the way, we stumbled onto a new strategy for ad sales, which has emerged as the key to the business success we’ve had. I’d like to say we designed it intentionally, but really it was the result of a cascade of other decisions:

  • First, the tabloid format. We chose a tabloid format to underscore the newness of the paper, to force new thinking on design and information and also, I confess, to trick the eye. It was hard to imagine a Monday ad stack that would justify more than about 20 pages broadsheet, which we thought would underwhelm our readers. But a 40-page or even a 36-page tabloid feels richer.
  • Next, fixed ad sizes and positions. We decided to fix ad sizes and positions to simplify production, to make it easier for readers to navigate this new and unfamiliar paper and to give advertisers certainty over where their ads would show up.
  • Finally, the columns. We wanted a five-column design to give the Monday edition a newsy feel. But this left us with ad sizes that wouldn’t translate to other days of the week.

Given ads that couldn’t readily be extended to or from other days of the week, we made lemonade. We decided to sell Monday-only contracts on specific ad spots for 13, 26 or 52 weeks. This fundamentally changed the sale dynamics. It introduced scarcity and urgency, and it helped us minimize switch advertising.

The upshot so far: We’ve had tremendous success on the first four goals. Reader response has been overwhelmingly positive, even to the radically new format, and even from long-term (older) readers. The paper looks great, the new elements have been well-received and we’ve maintained a strong focus on business and sports. It’s hard to gauge how much the narrative of decline has been changed to one of growth or at least stability, but to the extent that advertiser support is an indicator we appear to have made gains.

On the final and critical goal of making money, it’s still too early to say, although most indications are that bringing back Monday has helped. Ad sales have far exceeded expectations, and we’ve held on to the early advertisers. In our most recent edition, for example, we have just one house ad in the 20 spots we designed into the paper.

On the other hand, single-copy sales of the Monday paper have been lower than we had hoped and our trend with subscribers has been somewhat mixed. Our stops have been flat, but our starts have been weak. Because we  increased rates shortly after introducing the Monday edition, though, it’s hard to tease out the impact of Monday. On balance, I’d say it has helped us to retain subscribers, but that’s a hunch.

All in all, we’re pleased. Bringing back Monday appears to be helping us financially, readers are happier and it has strengthened our position in the marketplace after several difficult years.

That’s not to say it would make sense for other papers. We had some unusual factors that helped to make it feasible for us. We have a substantial commercial printing business, with two other dailies on the press on Sunday nights, so we already had the press crews here. We also deliver a number of dailies in our market; bringing our Monday back actually helped reduce some complications there (and service complaints). And we had shifted some Monday content to an extra Sunday section, so we already were using about a third of the newsprint we run for Monday.

So it may not work for everyone. If there are takeaways for other papers, they might include the following:

  • If you need to reduce costs, consider a tabloid format. You don’t save on distribution, but you can save newsprint and it forces you to rethink what you’re delivering. Our readers love it.
  • The ad sales model — fixed positions sold on contract — has been surprisingly effective; we’re trying to figure out other ways we can employ it.
  • And the editorial kicker: Don’t underestimate the value of the daily readership habit. Three years after we suspended Monday, it was by far our largest reader complaint and a consistent obstacle in sales.

Some readings:

 

Failure of imagination

So this is what passes for innovation in the newspaper industry? Taking the Times-Picayune, with its passionate daily print readership, from seven days to three is the best idea we’ve got?

Surely we could do better.

Those who style themselves realists point to the fact that newspapers like the Times-Picayune lose money most days of the week they print. The money’s in the fat days like Sunday; Monday’s a loser. Tally it up, and the decision is clear: Cut Monday. And why stop there? Why not cut Tuesday, cut Thursday and cut Saturday? Job done; here’s your new, “more robust” New Orleans Times-Picayune, as the management memo styled it.

What that ruthless logic overlooks, though, is the value of the readership habit. Generations of newspaper readers have grown accustomed to reading their paper every morning or afternoon. That daily habit forms a powerful bond between readers and their paper, and you disrupt it at your peril.

We certainly learned that in Frederick. Three years after cutting out our Monday publication, the lack of a Monday paper was far and away our top reader complaint.

The simple math of the hard realists also overlooks the basic reality that many businesses lose money some times of the day, some days of the week and even many months of the year. Outside of a few key buying periods, especially Christmas, many stores don’t cover operating costs every day of the year, or even every day of the week. Restaurants may scrape by early in the week to make their money as the weekend approaches. Yet these businesses stay open even during lean hours and lean days. After all, a customer who finds a business shuttered on Tuesday may go elsewhere on Friday, too.

The hope in New Orleans is that even if readers go elsewhere for news four days a week, they’ll still come back to the Times-Picayune on the other three. Maybe so. Maybe their readers are more flexible than ours were, or maybe there are fewer alternatives for them to choose from.

But what’s profoundly discouraging is that publishers in New Orleans, Michigan and elsewhere have embraced such radical surgery before attempting other therapies.

Would a tabloid format lower production costs enough to support at least weekday publication? What about differential pricing, for advertisers and for subscribers? Where are the radically re-conceived newspapers that try to meet readers where they are today? Why no experiments with targeted-interest papers, or cafeteria-model papers? Why not a three-day core news product with up-sells for a Business Monday edition, an Entertainment Friday edition, and so on?

Maybe none of these ideas would be enough to save a paper like the Times-Picayune. I only wish someone was trying. Otherwise, if the Internet and the economy don’t kill newspapers, we might just do it ourselves first.

Related readings:

The Wedge Strategy

It’s painfully apparent that digital revenue cannot yet support substantive professional journalism for smaller daily newspapers. I don’t know that it ever will, either. Fortunately, it does not necessarily follow that community newspapers are doomed.

If the goal is to find a near-term replacement for all the revenue necessary to support a newsroom and newspaper operation something like the papers we know today, the logical response is either to proceed on blind faith or give up in despair. But that’s the wrong goal. Think instead in terms of what I call the Wedge Strategy.

In simplistic terms, the Wedge Strategy frames the goal more modestly (and achievably) than trying to replace all the print dollars. With a Wedge Strategy, the goal is to fill the profit gap created by declining core revenue and increasing expenses.

You can expect long-term deterioration of core newspaper revenue. The rate and shape of that decline is anyone’s guess, but the fact of digital transformation cannot be denied. Meanwhile, there is inexorable upward pressure on expenses. The two lines move in opposite directions, and simple extrapolation quickly produces losses.

A Wedge Strategy assumes the key to survival is not necessarily to toss out the entire print newspaper business model in a desperate grab for digital dimes. Rather, the key is to work hard on bending both of those core newspaper trend lines, for revenue and expenses, while at the same time developing new revenue sources, especially online revenue, that fill the wedge.

Implicit in the Wedge Strategy is a belief that the physical daily newspaper is a unique, valuable and durable medium. It offers a level of engagement that’s hard to replicate online, it’s convenient and efficient for many uses, it’s cheap, it’s an old-school push technology that rewards curiosity and leverages hundreds of years of information design evolution to serve readers.

A print paper may not be everyone’s preference, and it is not likely to dominate even smaller markets in the future, but my assumption is that it will continue to adapt and will retain a valuable niche, perhaps serving educated, affluent, engaged members of the community. It may publish fewer days, it may shrink and change focus, but it will remain a significant factor.

As an illustration of what a Wedge Strategy might look like, I modeled a typical small daily newspaper with a nice, even $10 million in current revenue from its core operations. That might correspond to a paper with 20,000 circulation.

With $10 million in core operations, I assumed circulation revenue of $3 million, display revenue at $3.5 million (50 percent of ad revenue), classified revenue at $2.1 million or 30 percent of ad revenue and preprints at $1.4 million. Your mileage may vary, but those are within the bounds of industry experience.

I assumed this paper has not been terribly aggressive or successful at getting online revenue, so I put that at $250,000, with another $250,000 in “other publications.” Those I call the growth revenue opportunities.

I put expenses at $9 million, which gives this paper an operating margin of a bit under 15 percent. That’s pretty low by historical standards, but it’s certainly not crazy for this stage of the recession.

Now come the real critical assumptions. The value of a simple model like this is not that it might actually predict the future. I don’t know anyone that smart. Rather, it can help you identify what you need to do to succeed over time given certain reasonable assumptions. Then you have a goal, and you can begin to evaluate how likely you are to make that goal. And then you can start playing with better or worse scenarios.

My approach with this model is basically to solve for the wedge — to figure out what you need to raise is growth revenue to maintain a reasonable rate of return from operations.

My starting assumptions are the following:

  • Display revenue will increase modestly over the next few years with recovery, then it will flat-line for a few years, then it will start to decline at 5 percent annually. After 10 years, it will have dropped about 6 percent.
  • Classified advertising will just keep going down at 5 percent a year, dropping 40 percent over 10 years. (A straight-line is unlikely, but it makes modeling simpler, and, really, who knows?)
  • Preprint revenue will drop by 1.5 percent over the next four years and by 5 percent thereafter, leading to a 31 percent drop over 10 years.
  • Circulation revenue will drop a steady 1.5 percent, the assumption being that some online subscription revenue will offset slightly larger print declines.
  • One the expense side, I grossed everything up and assumed increases of 0.75 percent every year. That’s pretty tight cost control, but that’s our new reality.

Here’s what it looks like graphically:

With no growth, the paper dips below 10 percent operating margin in Year 5, and by Year 10 it’s losing more than $1 million a year.

So what’s the wedge?

To hit a 10 percent margin in Year 10, you need to maintain an average growth rate in online revenue and other publications of 18.2 percent. To hold a 15 percent margin, you need to grow at 20.8 percent.

In practical terms, a steady growth rate of 20.8 percent over 10 years is, of course, highly unlikely. But in absolute dollar terms, the numbers are somewhat less daunting, in part because this mythical paper is starting from a low base. That kind of growth rate gets this paper to online and other publication revenue of $1.65 million (each) after 10 years. That’s a bit less than 15 percent of total revenue.

That’s a stretch, to be sure. But it’s a tangible challenge that presents at least a possibility of success, a possibility that becomes more and more attainable the more you can do to hold those other numbers in line. Sure beats despair.

Here’s that future:

A good read from 1995

Thanks to Steve Yelvington for unearthing a prescient piece by Philip Meyer.

In AJR, back in 1995, Meyer predicted much of the disruption now shaking the news industry. Reading it today is fascinating, both for what he hit and what he missed.

First, a quibble.

Meyer talks about newspapers as high-turnover operations, similar to supermarkets, and suggests that high-turnover businesses should typically expect lower margins — unless they have a fortified (monopolistic) market position. So newspapers, he said, should get used to single-digit margins, say 6 or 7 percent instead of the 20 or 30 percent once common. And he suggests that new owners would be happy to step in to operate newspapers returning 6 or 7 percent.

I’m not so sure. I think turnover is less determinative than operational leverage, capital requirements and profit variability. Unlike supermarkets, newspapers have high operational leverage, with substantially fixed costs in production and distribution. They also have to make huge, lumpy capital investments in everything from presses to front-end systems. And, Gannett’s profit smoothng aside, profits can be highly variable. Even if circulation revenue is fairly stable, or at least predictable, advertising revenue swings with the fortunes of advertisers, and newsprint costs can quickly eat profits from the other side as the newsprint companies gain pricing power.

(A tangent: I’d love to see a chart comparing the profitability of newspapers and newsprint manufacturers over time. I’ll bet it looks a lot like the famous charts of the wolf and moose populations on Isle Royale.)

For newspapers, all of those factors mean risk, and with risk comes the need for higher margins to compensate. Ten percent is probably a more realistic minimum return to run a newspaper comfortably.

But that quibble aside, Meyer was right on the mark on so many points that his article still makes great reading:

He did a great job of explaining the trap imposed on current owners by high valuations, with his golden goose analogy. It’s the difference between a good business and a good investment.

He laid out the existential choice publishers faced, and largely failed, between squeezing their geese or accepting lower margins and investing in the future. (Of course, in fairness, it’s never been very clear exactly where one should be investing for the future.)

He emphasizes the importance of the virtuous circle, where dominance in an information marketplace leads to greater dominance. (I also find it helpful to think about this dynamic in terms of network externalities and lock-in, phenomena explored by Brian Arthur and many others.)

And he identifies trust as the key to maintaining dominance in an information marketplace, which is a great insight.

Unfortunately, I don’t think he or anyone else could foresee how effectively new, Internet-based businesses would slice up the newspaper business model and take over revenue streams like classifieds.

And it’s hard today to echo his confidence in trust as the critical monopoly-building asset. As we navigate a world of blogs and social media and channel proliferation, trust seems like a much more contested asset, and one that people are doing more to define on their own terms.

Patch and the Sonoma paywall

While writing about the Patch business model, I noticed in Romanesko that the Sonoma Index-Tribune dropped its $5/month paywall after Patch opened up in its market.

That action pretty well crystallizes the challenges news organizations face as they move toward paid-content models in competitive information markets. And it suggests that many, or even most, will ultimately fail.

Although incumbent print media may have good reasons to try to get value for their content online, even if only to slow the erosion of their print products, other actors may not be so compelled. Companies like Patch are operating purely under the Axiom of the Audience Imperative, where they rationally will always seek any additional reader they can attract for less than the marginal cost of production and delivery. Since the marginal cost of serving one additional reader online is essentially zero, they will always tend toward free. After all, they have no interest in limiting their attractiveness as an advertising platform by charging for content and restricting their audience.

The only way to escape this imperative is to carve out a non-competitive niche. News outlets could, in theory at least, so distinguish themselves on the basis of quality or depth or timeliness or perspective or ease of use or some other dimension that they can effectively lift themselves out of the competitive fray and charge for access. The Wall Street Journal is probably the best example of this, with its unique value in the business world; the New York Times may have a shot, too, because of its high quality and depth.

And countless publishers are now counting on the unique value of their local news reports to pull off the same trick in their markets.

As someone who hopes they succeed, at least for a while, and who has indeed pushed down the same path, what’s discouraging about the Sonoma reaction is not that they caved, but that they caved so quickly and to such a weak competitor.

I’m not familiar with the Index-Tribune, but it appears to be a pretty typical small weekly, or twice-weekly in its case, with a paid circulation of about 8,000 and a sister lifestyle magazine. (It actually sounds similar to the Monadnock Ledger-Transcript, where I was publisher for a few years, before the paper absorbed the competing Transcript and added a second day of publication.) It has an editorial team of about six. It’s got a Town News-built site; nothing flashy but serviceable.

In September, the Index-Tribune started its paid content experiment. The numbers on Compete appear show a big hit to their traffic, cutting it by maybe a third to a half, but it’s hard to tell precisely, because of seasonal variation and the short time frame. In any case, Patch comes in less than three months into the experiment, presumably with its typical single-reporter staffing plus stringers, and the Index-Tribune throws in the towel.

The inescapable conclusion is that the Index-Tribune’s site and content was not sufficiently differentiated and irreplaceable in the eyes of readers.

Now it may well be that the Index-Tribune is not a very good paper and had no chance of succeeding with paid content, with or without Patch. Maybe all of its 8,000 print readers are just traditionalists who need to feel a paper in their hands, no matter how bad it is. Certainly their website is not as slick as the Patch site, which can’t be helping them in this battle.

But I suspect the Index-Tribune’s experience points to a more discouraging truth, one that will dismay publishers across the country in the months and years ahead, as they try to charge for content while facing an ever-widening array of free, community-based competitors: Our readers don’t love us as much as we think.

For most people, I suspect, general community news is pretty much a commodity. Journalists may see a huge gulf between established players and thinly reported news sites that rely on community contributions, but for many people the competitors are good enough. Readers may still respect and turn to the traditional outlets. But if there’s a free, “good-enough” alternative online, they are unlikely to pony up the subscription fee to support the old standby.

Sigh.

Even so, it’s probably still a good idea for print publishers to push ahead on paid content models. (As long as they do it wisely. And as long as they are prepared to act quickly if conditions in their markets change.) It certainly won’t help their web operations. But it may help to preserve their flagging print operations long enough for them to step smartly into the electronic future.

Patching together a hyperlocal business model

In the forthcoming AJR, Barb Palser argues that journalists should “give Patch a chance.” After all, she says, they’re hiring reporters and making a good effort at doing hyperlocal news.

For all the debate about the work environment and expectations (see the the Business Insider and the Chicago Reader), at least they’re not just ripping off teasers from local newspapers and using that to sell directory listings, classifieds, deals, online display ads and whatever other revenue streams they can conjure. So kudos to them for that.

But I don’t envy them their business challenge.

Several people have weighed in with skeptical looks at the business model. (See this quick list of published critiques.) For the most part, these are prospective estimates, developed before there was much of a track record to evaluate.

Now, with some of Patch’s early sites entering toddlerhood, we’re starting to get a better sense of the business realities behind hyperlocal publishing Patch-style.

And it’s daunting.

Slim pickings on traffic

Compete.com gives an approximation of the traffic coming to various Patch sites. Compete is not perfect, as anyone with access to detailed site logs will know, but it’s a reasonable enough outside view, and at least it gives us a little more to chew on in trying to deconstruct the Patch business model. So far, according to Compete, Patch sites don’t seem to be generating anywhere near enough traffic to sustain any substantive, dedicated editorial effort — even the more established sites.

Last month, according to Compete, the top Patch subdomain attracted fewer than 32,000 unique users. The next subdomain on the list had just over 13,000 users.

Interestingly, that top Patch subdomain was for Ashburn, Va., a site that just launched in October. (As a point of reference, the town has a population of about 88,000.)

The second site on the Compete list, for the far smaller town of Maplewood, NJ. (around 24,000 population), has been around for more than a year. It had its best month of the year in October, when it topped 13,000 users, but mostly it has bounced around between about 2,000 and 10,000 UUs for the last 12 months.

I don’t have the high-dollar Compete membership, so I don’t know how many page views any of that translates into. But Patch overall gets about two visits per user per month, and if you grant them five PVs/visit, you can estimate the October PV volume at about 320,000 for Ashburn and about 130,000 for Maplewood.

It’s pretty tough to develop a business plan that supports ad sales, ad and web production and editorial on top of 320K PVs/month, let alone on 130K PVs/month.

But let’s try.

Hyperlocal costs

The costs are relatively easy to estimate. Patch is apparently paying around $40,000 for reporters, and they have committed to hiring dedicated editorial staffer for each community, with editors overseeing clusters of Patch sites. (See Ken Doctor’s description of the structure.) They’re also paying for freelance contributions, at least initially. With benefits and the rest, you’re looking at $55,000 or $60,000 per site for editorial, ignoring the editorial structure at the cluster level and the freelance budget.

On the ad side, the basic structure as described by Ken Doctor suggests between one and two salesreps per town at final build-out. If they pay their local salesreps no more than their editorial staff, they’d be burning through another $55,000 to $120,000 on local ad sales alone. Call it $80,000 on average for local ad sales, and you’re up to about $140,000 for ad sales and editorial alone.

Then you’ve got production and technology and corporate overhead. That certainly will be centralized. Leaving site development aside as a sunk cost, let’s lowball all of this at $20,000 a year. And let’s assume the operations are entirely virtual, with no local storefront presence.

So we’re looking at a nut of about $160,000 a year per site.

A rough look at revenue

On the revenue side, we can try to build up an estimate by looking at each of the potential revenue streams, such as display ads, marketplaces, directory products, Groupon-like deals and so on.

But first, let me propose a very crude rule of thumb approach that works reasonably well for modestly sized news sites. My experience has been that a very well-run news operation would be happy to get, on an annual basis from all web-related revenue sources, about 40 cents for every monthly PV. So a site with 5 million monthly PVs could gross $2 million annually. A site with 1 million monthly PVs might get about $400,000. More typically, I’d suggest the number is closer to 20 or 30 cents per monthly PV.

But maybe Patch, with all of the accumulated wisdom of AOL and its serious technology and sales chops, will do much better than 20 or even 40 cents per thousand monthly PVs. They’re certainly in a much-better position to get national ads. Maybe they’ll get 50 cents.

For Maplewood, that suggests annual revenue of about $65,000 at the 130,000 PV level. You’re certainly not going to be able to afford a dedicated salesrep and dedicated editorial staff on that kind of a revenue base. And remember, that’s their second-best site, and it has been up for more than a year.

For Ashburn, at 50 cents/K PVs, you’d be earning $160,000. Not bad — they could be breaking even.

But that 50 cents per thousand PVs a month is a tough bar to hit. It depends on flawless local sales execution, great national ad sales support and significant penetration through self-service windows. Certainly, as is clear from even a cursory view of their sites, they’re nowhere near that now.

So what happens if they hit more typical revenue levels? What kind of traffic do they need to support the sites?

Given a more realistic but still generous estimate of 40 cents per thousand monthly page views, the break-even rises to 400,000 PVs. At 30 cents per thousand monthly page views, they’ve got to hit more than 530,000. If they get “just” 25 cents per thousand — a level many community news publishers would be thrilled to reach — they’d need 640,000 PVs/month.

I’ll give them some credit for executional skill. Even though we’ve probably low-balled the expenses, this crude approach suggests the Patch model is doable at about 500,000 PVs a month, but it depends on really good sales execution and a very tight rein on expenses.

A build-up view of revenue

I also tried building revenue up more atomically, estimating the potential from online display sales and other sources. That process is a whole ‘nother thesis in itself. I won’t go into the grinding details, but here’s an overview.

Assume the revenue pillars for sites like this are online display ads (including video, standard IAB units and so on), marketplaces (classifieds and related verticals) and directories (including coupons micro sites and Groupon-like deal programs). There are lots of ancillary revenue possibilities (archives, photos, events, auctions, mobile apps, what have you), but it’s probably safe to assume the Patch sites need to cover their costs with the tried-and-true revenue pillars. That said:

  • The potential for online display revenue is easy enough to estimate; make your own guesses based on average sell rate, spots per page and average CPM. With my most generous estimates, I see a chance to cover about half the $160,000 nut through display sales at a site with 500,000 PVs.
  • The potential for marketplace revenue is also pretty easy to estimate — it’s basically nil. With craigslist, ebay, job sites, car sites and real estate sites killing long-established newspaper marketplace franchises, the odds of a new player gaining a toehold here are tiny. And a look at Patch sites today shows minuscule use of their marketplaces I checked out the four sites with the most traffic that had been open for a year and counted 14, four, six and six classifieds.
  • The key to Patch’s success, then, seems to be in their business directories and in their ability to extend revenue from their directory infrastructure through deal programs, business micro sites and blogs, niche interest sites and whatever else they can cook up. And the directories are pretty darn impressive, with tons of photos, nice layout and good execution on all the things you’d expect. (Check out techcrunch for more on their plans here.)

So can they get $75,000 or $100,000 a year out of local businesses? Maybe. Certainly other small-market online publishers have. Selling directory listings is a tough job, though, with lots of competition. If they can get close to $100 a month or $1,000 a year from each advertiser, the price goal cited by techcrunch, they only need to sell 75 or so to hit the nut. But if they get more like $25 a month, then they have to sell closer to 400 businesses on the listings. In a town like Maplewood, that has to be a pretty high percentage of the potential advertisers.

Ultimately, their ability to sell deals and directories and all the rest (or at least to retain the advertisers they do get) will depend on whether they can deliver real value to advertisers. And that depends at least in part on simple volume. At 500,000 PVs per month, or even a million, precious few trickle down to the listing for any individual business.

Climbing the mountain

Now maybe 500,000 or a million PVs per month doesn’t sound like much to an AOL exec based in New York. And maybe there are lots of underserved towns and suburbs with desirable demographics and commercial centers, all of them just waiting to flock to Patch.

But 500,000 PVs is 12,500 loyal users coming to the site twice a week and looking at five pages each time, for a total of 40 pages a month.

Certainly, Patch sites today don’t seem to be generating that kind of reader engagement. Check out the Compete charts for Maplewood, Ridgewood, Darien and Garden City — all of which have been open for more than a year. They’re all growing decently, but outside of Garden City, which had a spike mid-way through the year, the charts don’t show them on a path to hit 500,000 PVs any time soon. Most importantly, as I noted above, the top-level Patch stats show an average of only two visits per user.

To develop deep reader engagement, with all of the competition and alternatives out their in the real and virtual worlds, you’d better have some useful and lively content resources. No one editorial person, short of Clark Kent, could do that. The only hope is that community members will step up and make the site their own, turning to it as the focal point for community dialogue.

And maybe that will happen, at least in some Patch communities. The sites aren’t bad, and they’ll get better. I wish them luck with that. But how many of Patch’s now-planned 500 sites will strike gold like that? And can they carry the rest?

I can’t help think that when long-established media companies with deep roots and journalistic expertise struggle to develop the traffic and the revenue models that support meaningful journalism online, maybe it isn’t so easy for a tech company to waltz in, hire a tiny editorial staff, stuff a community site with reader comments and rake in the dough.

More reading on Patch’s model

See main post, “Patching together a hyperlocal business model.”

One of the best looks at Patch’s business model comes from Ken Doctor on Seeking Alpha.

The Atlantic Wire raises some key questions about the Patch model and links out to some good resources.

Business Insider’s early take, “AOL’s Patch Revenue Model Makes No Sense,” has been much quoted, but it doesn’t delve far beyond the revenue from display ads.

And check out TechCrunch’s look at the Patch directories.

Disengagement

I spent a couple of days recently modeling the impact of paid content on a representative small daily newspaper.

I hope to post a little more later on my approach and results. (Spoiler alert: The near-term loss of ad revenue can be minimized fairly easily, to the point that it’s offset by even microscopic subscription uptake, when you have a lot of unsold ad inventory.)

But right now what I’m really wrestling with are some of the implications of the reader segmentation I did to prepare for the modeling.

Much as Jonathan Stray did several months ago with his paywall calculator, I started with a look at who’s coming to the site.

The site I was looking at does not have great data on its users. It relies mostly on Google Analytics and gets some corraborating information from the ad-serving platform. Registration currently is not required, so there’s little useful information there, and there has been no real effort to mine that.

Google Analytics is not a great tool for doing user segmentation, I found. Like Omniture and other stat services, it seems to be mostly focused on generating visit-based data. But I was able to back my way into a rough picture of site users, breaking them into four groups: fly-by, casual, moderate and loyal users.

The results were sobering.

Here is an open news site in a market that doesn’t have a lot of direct, local online news competition. The paper has a good reputation and enviable print penetration. It’s been online for years, and it has a really full news report with all the standard folderol — yellow pages, classifieds and verticals, photo galleries, reader comments and so on. Yet very few online readers demonstrated loyalty or use approaching anything like the readership of the daily print paper.

Consider: For every thousand Sunday print readers (calculated using the well-established 2.3-times-sales factor), this paper had only 55 heavy website users and another 54 moderate users.

There are data complications, of course. Without tying back to registrations, I can’t tell if some of the casual UUs are home visits from people who are moderate users from their work computer, or vice versa. If I could track that duplication, I would likely see more moderate and heavy users.

On the other hand, it’s anyone’s guess how many of those heavy users simply have the site loaded as their browser’s home page, which would boost their apparent usage without reflecting actual readership of the site. And, more importantly, I set a pretty low threshold on the segment definitions. I defined moderate users as those who came to the site more than 10 times in a month, meaning they looked at between 40 and 50 pages, because I wanted their use to correspond roughly to the likely metered threshold.

There’s plenty of room to argue about the absolute precision of the numbers, but to me the real takeaway is clear: This site’s online readers are nowhere near as engaged with the product as are its print readers.

That’s a problem. And I don’t think the problem is specific to the site I looked at.

The engagement problem is obvious to anyone who spends time looking at news site stats and compares them to research on print readership. Visits typically range from four to six pages, which means maybe three or four actual stories read. Visit times are just a few minutes, compared to the 20 minutes or so the typical print reader spends with the paper. And precious few online readers have established the kind of daily reading habit that comes with a home subscription.

To a certain extent, much of this may just be the nature of the medium. I seem to recall once seeing data that suggested traditional news readership made up about 7 percent of the average online user’s time, but I was not able to find good recent data on that. Beyond any measure of time devoted to news readership online, it may also be that web-based news sites serve and reward quick-hit news grazing, as opposed to the kind of immersive experience you get with print. (Perhaps tablets will help to change that.)

And, of course, you have to look at what traditional news sites are publishing. With most news sites still shoveling print content online, leavened with a few breaking updates and some extra photos (if you’re lucky), it may be that news sites are still doing “radio on TV” and haven’t adapted quickly enough to the online medium.

Whatever the cause or causes, news sites simply have to focus on engagement if they are to thrive. If what we’re doing is not captivating readers, we have to change. Especially if we want to charge.

For 2011, my early resolution: Ignore PVs. Focus on metrics of engagement like PVs/visit, visits/UU/month, time on site and the raw count of heavily engaged users.

Cyber Monday question

So how many people swarmed their local newspaper websites last week looking for all the Black Friday deals?

Right. Unless your local newspaper offers online versions of the circulars, nobody did.

That’s a problem. Online news sites are becoming increasingly irrelevant to people looking for focused shopping information, the very thing, arguably, that gave newspapers a 200-year run as the dominant mass-market medium.

Online circulars might help.

None of the papers I’ve worked with have used them, partly out of concerns that they would undermine print sales, and partly because some of the early versions were so clunky. Today, though, the user experience has improved, and the movement toward paid content suggests a tactic that minimizes cannibalization: Use the online circulars as a value-add benefit for print or online subscribers.

But that’s at best a partial solution.

Just tacking online circulars on to a site creates another information silo, a potentially useful resource that languishes until and unless someone makes an active decision to dive into it.

It seems to me the key to making the most out of online circulars — and all the other commercial information embedded (and isolated) in banners, sponsorships, linked advertiser landing pages, directory listings, business blogs and so on — is to capture and integrate the metadata behind them.

In the meantime, who’s got the best online circulars? Shoplocal? And if you work at a paper with online circulars, what was your Black Friday experience?